Driven by a need to streamline oversight and find new ways of generating yield, insurers in Europe are consolidating their outsourced investment assets and leveraging the expertise of asset managers to a greater extent than ever before, according to the latest issue of The Cerulli Edge—Global Edition.
Cerulli Associates, a global research and consulting firm, indicates that strategic partnerships are helping insurers to address increased oversight related to Solvency II and poor returns linked to low-yield assets in Europe, especially government bonds.
Cerulli’s 2019 insurance research found that 29.1% of European insurers expect to reduce the number of third-party asset managers they work with over the next 12 to 24 months, more than five times the 5.5% expecting an increase. Some 16.4% expect no change and 49.1% are unsure.
Only large insurers—those with assets of more than 100 billion euros (US$114 billion)—are expecting an increase. Such insurers are better able to cope with the complex oversight associated with outsourcing to many asset managers.
“Although partnership-type engagement has been triggered by regulatory and economic pressures, the approach is most likely here to stay,” says Justina Deveikyte, associate director, European institutional research at Cerulli.
Deveikyte notes that partnerships differ from traditional mandates in that insurers demand a range of services, from governance and risk management to operations and bespoke product research.
“Simpler oversight and greater investment returns are the two key goals of strategic partnerships. We expect to see continued demand for riskier fixed-income and illiquid assets,” she adds.
Demonstrable insurance expertise is required to win business. Managers with dedicated insurance solutions teams will be more in demand and will likely be better able to cope with the intensified client management regime required of strategic partners.
“The best-placed managers are those able to broaden the scope of services they can provide beyond traditional insurance expertise, such as matching adjustment, and offer support across the entire investment process,” says Deveikyte.
Given the inflated mandates resulting from the consolidation of outsourced investment assets, it will likely be the largest managers that are best suited for strategic partnerships. However, although most new partnerships are likely to be around 2 billion euros to 3 billion euros in size, and upward of 4 billion euros for partnerships with holistic services, there is still opportunity to partner on a smaller scale with smaller insurers.
In the US, Cerulli research finds that the growing need to diversify away from traditional fixed-income and public equity markets is encouraging the “retailization” of alternative investment strategies, spreading demand beyond the traditional institutional and high-net-worth client base. Ample opportunity now exists for alternative asset managers to offer quality products at attractive price points in the retail space to advisors and end-investors.
Cerulli forecasts suggest that investable life insurance assets in Asia (excluding Japan and Hong Kong) will record a compound annual growth rate of 15.2% from 2018 to 2022. China will account for nearly 55% of total investable assets by 2022, with US$3.6 trillion. Korea and Taiwan will remain key institutional insurance markets due to their significant investable assets. In Indonesia and Taiwan, investment-linked products are thriving.